Tracking Alabama's Overtime Tax Exemption in QuickBooks Payroll
Alabama's overtime exemption now covers salaried nonexempt workers. Here is how QuickBooks users are setting up and reporting the tax-exempt amounts.
QuickBooks payroll users in Alabama are adjusting their workflows to handle the state’s amended Overtime Exemption Act, which has expanded in two phases and now requires manual tracking of tax-exempt overtime pay within QuickBooks.
What changed under Alabama law
Alabama amended its Overtime Exemption Act to exempt qualifying overtime pay from state income tax withholding. The change rolled out in stages: hourly nonexempt employees have been covered since January 1, 2024, and the exemption was extended to salaried nonexempt employees starting October 1, 2024.
Under the law, any work performed beyond 40 hours in a standard workweek is exempt from Alabama income tax withholding, regardless of whether it is paid at the overtime rate or as regular pay. The exemption applies to all paycheck dates from January 1, 2024 through June 30, 2025.
One nuance worth noting: overtime pay earned in excess of 8 hours a day under a collective bargaining agreement is not exempt if the employee does not exceed 40 total hours in the week. Employers must report the tax-exempt amounts on a monthly or quarterly basis and on Form W-2.
How QuickBooks users calculate the exempt amount
QuickBooks does not automatically isolate the Alabama-exempt portion of overtime, so users need to calculate the dollar amount manually before entering it. The process is straightforward: identify the hours worked beyond 40 in a given week, then multiply those hours by the applicable rate.
For example, if an employee works 42 hours in week one and 40 hours in week two, the tax-exempt hours for the pay period total 2. At an overtime rate of $22.50 per hour, the exempt pay amount comes to $45.00. That figure is what gets entered into QuickBooks.
Entering the exemption during payroll
In QuickBooks Online Payroll, users navigate to the Employees section, select Run Payroll, and then choose Actions followed by Add tax-exempt pay next to each eligible employee. The calculated dollar amount is entered there and added to the paycheck. The process must be repeated for each employee who has tax-exempt amounts for that run.
Users who rely on Auto Payroll can handle the exemption there as well. Under Payroll Settings, the Auto Payroll section lets you update upcoming pay schedules. Next to each employee, an Actions menu provides the same Add tax-exempt pay option, where the exempt value can be saved ahead of time.
Correcting paychecks after the fact
When a paycheck has already been processed and the exemption was missed, users can edit it through the Paycheck list. From the Employees tab, selecting Paycheck list brings up processed checks. Each employee row has an Actions dropdown with an Edit option. Next to the Alabama tax-exempt pay field for that period, users can select Edit and enter the correct amount.
The Paycheck list also lets users open any individual paycheck to review the details or make corrections if the check is still eligible for adjustment.
Reporting and visibility
Several reporting options help users verify that the exemption is flowing correctly. The Payroll Details report, found under Standard reports, can be filtered by paycheck date or period to show the amounts in question. On the employee side, the tax-exempt amounts appear on pay stubs accessible through QuickBooks Workforce, giving workers visibility into the adjustment.
QuickBooks Desktop setup
For QuickBooks Desktop users, the setup follows a different path. After getting the latest payroll update, an item called the AL OT Withholding Exemption becomes available. Users open the Employee Center, double-click an employee, and navigate to the Payroll Info tab. Under Taxes and then the Other tab, the exemption item can be added to the employee’s profile. This step needs to be repeated for each full-time hourly employee, and the item appears in the payroll item list once the update is installed.
What to watch for
The manual nature of this calculation means the exempt amount must be recomputed every pay period based on actual hours worked. Users running payroll for a mix of hourly and salaried nonexempt employees should confirm that both groups are covered under the correct effective dates — hourly from January 2024, salaried nonexempt from October 2024 — and that the exemption sunsets on June 30, 2025 unless further legislation extends it.